South Korea's headline consumer price index rose 2.6 percent on the year in July after an increase of 2.4 percent in June, moving further above the Bank of Korea's 2.0 percent target. This is the first increase in headline inflation since February. The index rose 0.3 percent on the month after decreasing 0.2 percent previously. The increase in headline inflation was largely driven by transport prices. These rose 1.7 percent on the month after a sharp decline previously, with the year-over-year increase accelerating from 3.8 percent to 5.2 percent.

Underlying price pressures, in contrast, were steady in July. Core CPI, excluding food and energy, rose 2.2 percent on the year for the third consecutive month, and rose 0.3 percent on the month versus no change previously. Core inflation has fallen only slightly from 2.5 percent at the start of the year to its current level. The year-year-over-year increase in prices was relatively steady for most major categories of spending.

At its most recent policy meeting, held last month, the BoK left policy rates on hold. Officials advised then that they had retained their forecast for core inflation to average 2.2 percent this year but noted uncertainties about the inflation outlook and highlighted that"it is necessary to further assess whether inflation will continue its slowing trend".

Although officials concluded that monetary policy should remain restrictive"for a sufficient period of time", they also noted for the first time this cycle that they are open to considering a loosening in policy settings, advising that they"will examine the timing of a rate cut". Today's data, however, suggest that their focus will remain on the inflation outlook at their next meeting, scheduled for later this month.

Consumer prices in July, which in June slowed from May's 2.7 to 2.4 percent, are expected to edge up to 2.5 percent.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from mortgages and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.